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Here is our suggested bequest language for use by our donors and advisors.

Monday August 29, 2016

Washington News

Washington Hotline

Impersonation Scams Reduce IRS Credibility

IRS agents regularly meet with taxpayers for audits and tax enforcement actions. While IRS agents are not normally popular with the public, the large number of IRS impersonation scams is creating a new problem. Many taxpayers now question whether IRS revenue agents actually represent the government.

At the IRS Nationwide Tax Forum in National Harbor, Maryland on August 25, Daron Guillot, Director of the IRS Small Business/Self-Employed Division, explained the problem. Some of the IRS revenue agents from his section have been confronted by taxpayers who refuse to believe they are with the Service. Guillot noted, "I have my employees being detained by police because they think we are fakes because the perpetrators of these heinous crimes, these impersonators, are so darn good at what they do."

Guillot also explained to taxpayers how they can determine if a revenue agent is actually from the IRS.

1. Credentials – You may ask the IRS revenue agent for identification.

2. Contact IRS – You may ask to speak with the supervisor of the revenue agent.

3. Incarceration – A revenue agent will not threaten you with being imprisoned if you do not immediately make a payment.

4. iTunes Cards – Revenue agents will not ask for payments on a gift card. Taxpayers may pay by check or use the online electronic payment method on www.irs.gov.

5. Installment Payments – Many individuals who owe $50,000 or less may qualify to pay their tax bills in installment payments. The payment plan is generally between 120 days and 72 months. By 2015, 322,000 taxpayers with a tax obligation of $1.3 billion had entered into online agreements.

Guillot encouraged taxpayers to consider the installment agreement. He stated, "Three-hundred and twenty thousand isn't close to what we had hoped to achieve. We would love to get to 2.9 million." If most taxpayers who owe payments to the IRS use the online installment payment service, the IRS Enforcement Division could focus on the most seriously delinquent tax offenders.

IRA Rollover Hardship Relief

In Rev Proc. 2016-47; 2016-37 IRB 1 (23 Aug 2016), the IRS permitted self-certified waivers for certain IRA rollovers. Generally, rollovers from one IRA custodian to an IRA owner and transfer to the new IRA custodian must be completed within 60 days. Sec. 408(d)(3). Some taxpayers who seek a Sec. 408(d)(3)(l) 60-day waiver have spent approximately $10,000 to obtain a private letter ruling.

Therefore, the IRS decided to create a simplified procedure for 11 IRA rollover situations in which the taxpayer exceeds the normal 60-day limit. The ruling includes a model letter to claim qualification for a waiver. There are 11 circumstances when the self-certified waiver is permitted.

The model letter must include four sections.

1. Deadlines – The IRA owner has missed the normal 60-day rollover deadline.

2. Compliance – The IRA owner agrees that he or she will comply with all of the other provisions of a qualified IRA rollover.

3. Reasons – The 11 reasons include error by the financial institution, loss of the check, assumption that the new account was qualified for an IRA rollover, severe damage to a residence, death in the family, serious illness, incarceration of the IRA owner, foreign nation restrictions, a post office error, levy of the account by the IRS or information transfer delay by the original IRA custodian.

4. Affirm – The IRA owner must affirm that the statement is true, there has been no previous denial of a waiver and the IRA owner understands that he or she may be subject to excise taxes, interest and penalties.

The IRA owner is required to save one copy and send the letter to the IRA custodian or plan administrator.

To DAF or Not to DAF

In a letter from the American Bar Association Section of Real Property, Trust and Estate Law, several Donor Advised Fund (DAF) and non-DAF examples were submitted to the IRS. The IRS has a pending project to publish DAF regulations under Sec. 4966. The letter was from David Dietrich, Chair of the ABA Section. The principal ABA contacts are Professor Chris Hoyt and Attorney Grace Allison.

The letter was in response to a Treasury request for examples that would help clarify when community foundation funds are and are not under the DAF rules. The 800 plus American community foundations have experienced substantial growth for both DAFs and for other types of funds. All community foundations are extremely interested in understanding when funds are not subject to potential Sec. 4966 penalties for violation of DAF rules.

There are seven specific examples of community foundation funds that should not be classified as DAF's.

1. Field of Interest Fund – A fund is created with no donor advisory control. The donor's financial advisor is hired to manage the fund investments, but the community foundation retains the right to dismiss the financial advisor at any time.

2. Memorial Fund – A donor creates a memorial fund for his or her parent. There is an advisory committee to make the grants. The donor, relatives or appointees of the donor may not serve on that grant committee.

3. University Fund at Community Foundation – Donor and spouse create a fund that benefits a specific university. They retain the right to make advisory requests for grants to projects solely within that university. Under Sec. 4966(d)(2)(B), this is not a DAF because it benefits a single organization.

4. Less Than 50% of Grants Committee – The donors create a field of interest fund and a grants committee makes all recommendations for distributions. The donor, relatives or appointees of the donor may serve on the committee, so long as they are less than 50% of the total grants committee.

5. City Fund – Five donors create a fund to facilitate beautification of their community. Seven other independent and unrelated persons are selected for the grants committee. The seven other individuals also make donations to the fund. This is not a donor advised fund because it is not controlled by a donor.

6. Agency Fund – A social service organization uses a large bequest to set up an agency fund. Even if the grants committee includes members of the social service organization board, this is not a DAF. It qualifies under the Sec. 4966(d)(2)(B) one organization exception.

7. Fiscal Sponsorship Fund – A domestic violence shelter is not yet a qualified Sec. 501(c)(3) nonprofit. The community foundation manages a fund created by shelter board members and other donors and makes distributions in its sole discretion for the shelter programs.

Editor's Note: If the IRS accepts these proposed examples, these community foundation funds will not be subject to the DAF rules and penalties. These are very reasonable and useful examples of non-DAF funds and may be included in future IRS regulations.

Applicable Federal Rate of 1.4% for September -- Rev. Rul. 2016-20; 2016-36 IRB 1 (18 August 2016)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2016. The AFR under Section 7520 for the month of September will be 1.4%. The rates for August of 1.4% or July of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published August 26, 2016

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